Trade policy in swing: Indonesia’s attitude to liberalisation and the TPP

Author: Yose Rizal Damuri, CSIS

When Indonesian officials are asked about the Trans Pacific Partnership (TPP) and Indonesia’s involvement in the proposed trade agreement, they normally answer that the country is paying attention to the process and the possible results of the negotiation, but has no interest in joining agreement at this time.

Indonesian dock workers unload  sugar imported from Mexico at Tanjung Priok port in Jakarta. (Photo: AAP)

Doubt over Indonesia’s capacity to carry out proposed commitments in the trade deal as well as uncertainty regarding the potential for any significant benefits to the economy are cited as the main reasons for this position.

Indonesia is not very active in forming trade deals with its partners when compared with other countries in the region. While Thailand, for example, has signed bilateral trade agreements with eight partners and is working to conclude nine more in the near future, Indonesia only has two bilateral agreements, with only one implemented. Many proposed bilateral talks with trading partners are stalled, with some, such as the proposed agreements with the European Union, showing little progress for several years. Most of Indonesia’s trade agreements are regionally negotiated as part of ASEAN initiatives, such as the Regional Comprehensive Economic Partnership (RCEP), the recently launched trade agreement between ASEAN and its six main trade partners in East Asia.

In this context, it can be seen that Indonesia’s ambivalent position towards the TPP comes from the recent general attitude towards openness and integration. Historically, Indonesia is not generally in favour of preferential trade liberalisation, preferring unilateral or multilateral initiatives instead.

Through unilateral efforts since the 1980s, Indonesia has maintained a relatively open trade regime. But the country’s stance towards liberalisation has varied widely depending on the economic situation.

Currently, negative sentiments about liberalisation and openness seem to be prevalent. Various measures to restrict imports, mostly in agriculture and food products but also more subtle regulations affecting manufacturing products were recently introduced. An obsessive drive to increase value-added and a determination to promote industrialisation have lead to the reintroduction of interventionist policies, including restrictions on investment and the export of unprocessed commodities.

There is a common perception among Indonesian policymakers and government officials that what Indonesia needs at the moment is to improve competitiveness, not to open the economy or expand market access. According to this line of argument, Indonesia should deal with its challenges and problems, such as inadequate infrastructure and high costs, before trying to maintain a more open trade regime and establish trade agreements. Otherwise, Indonesia will be unable to compete internationally and simply be an attractive market for its trading partners. This claim is reinforced by the perception that Indonesia’s domestic market is big enough to support domestic producers provided sufficient protections are granted and facilities made available for their expansion.

The existing trade agreements are also considered to be unsuccessful in delivering their promises. The agreement between ASEAN and China is blamed for increasing Indonesia’s imports while only serving China’s hunger for raw materials and energy. The agreement with Japan has not increased market access as Indonesian products cannot meet the standard requirements of Japanese industries and consumers.

Given this attitude, it is not surprising that Indonesia shows little interest in trade deals, including the TPP. As a comprehensive and advanced trade agreement, the TPP covers many economic issues that are not in Indonesia interests. Joining the trade pact is expected to be costly to the economy and would likely reduce competitiveness even further. Moreover, with only Vietnam — generally considered Indonesia’s main competitor — currently in the TPP, the threat of potential export losses from staying out of the agreement seems limited. Potential trade diversion effects would be serious if China, Thailand or the Philippines were joining the trade deal, but such is not the case with the current TPP members, which are mostly high and high-middle income countries.

Looking beyond the TPP however, Indonesia should change its attitude that the country is not ready for a more open economy. Improving competitiveness and economic integration are not mutually exclusive; in fact they reinforce each other. For one, a more open economy, especially from reciprocal trade agreements, would expand the market base and opportunities for local producers. While Indonesia has a big potential market of 240 million people, its total consumer purchasing power is not as big as that of most developed markets. An outward looking trade regime would facilitate Indonesia participating more actively in the global and regional production network. Its involvement is currently very low.

Trade agreements would also increase Indonesia’s attractiveness as an investment destination. Low border barriers reduce the cost of production by allowing investors to source capital and intermediate goods more efficiently. Reciprocal greater market access also means that those same investors can sell their products in the partners’ markets more easily, not merely for domestic consumption. With foreign direct investment (FDI) of less than 3 per cent of its GDP, despite recent increases, Indonesia needs to draw more investment from abroad.

Finally, trade agreements can increase transparency and improve the predictability of Indonesia’s economic policy direction, a necessary condition for attracting more FDI. With various measures aimed at behind-the-border problems, high-level trade agreements such as the TPP provide support for the regulatory reforms Indonesia needs for further economic development. Engagement with negotiations for such high-level agreements would allow Indonesia to learn from best practice how to effectively regulate its economic environment.

Improving competitiveness usually goes hand in hand with competition. Competition puts pressure on producers to work efficiently, to be more innovative and eliminates rent-seeking activities. The most effective way to introduce competition is by opening up the economy to imported goods and services. For example, Indonesia’s service providers, such as those in the logistics and transportation sector, would produce higher quality and more efficient services if they had to face competition from overseas providers. This would have positive downstream effects by ensuring better support for economic activities.

Trade agreements should not be viewed with a mercantilist sentiment. This leads to the conclusion that they are not successful unless they increase exports. The gains from liberalisation take many forms, ranging from increased foreign investment to opportunities for reform and improved competitiveness, not to mention benefits to consumer welfare. Indonesia may not be interested in joining the TPP in the near future, but the decision should not come from anxiety towards more open policies and trade agreements. The country should take more action in pursuing RCEP and be committed to developing that trade agreement into a high-quality one. This would maintain ASEAN centrality, and help take back the leadership role in regional integration.

Yose Rizal Damuri is Head of Economics, Centre for Strategic and International Studies, Jakarta

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Indonesia’s choices’.